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Rating philosophy and dynamic properties of internal rating systems: A general framework and an application to backtesting

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Author Info
Cornaglia, Anna
Morone, Marco
Abstract

The paper draws a general framework for asset and default dynamics, separating the influence of the economic cycle into a component which is embedded in the rating system and an unobservable risk factor that determines the movements of defaults around the ex ante estimated PDs. The two components – the sensitivity of ratings to credit cycle and conditional asset correlation - can be quantified through a Maximum Likelihood approach, giving a measure of the cyclicality of the rating system, and allowing for a number of applications: among those the modified binomial test proposed here.

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File URL: http://mpra.ub.uni-muenchen.de/14711/
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Publisher Info
Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 14711.

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Date of creation: 23 Jan 2009
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Handle: RePEc:pra:mprapa:14711

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Related research
Keywords: rating philosophy; rating dynamics; cyclicality; asset correlation; migration matrices; ML estimation; backtesting; binomial test;

Find related papers by JEL classification:
C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Estimation
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure
C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Statistical Simulation Methods

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This page was last updated on 2009-12-8.

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